Get Your Shopping Done With These 2 Grocery Stocks Following the recent bank failures, the Fed stands at policy crossroads, weighing strong economic data against jittery capital markets. Amid an inflationary environment, grocery stocks tend to fare better than...

Following the recent bank failures, the Fed stands at policy crossroads, weighing strong economic data against jittery capital markets. Amid an inflationary environment, grocery stocks tend to fare better than others, given an inelastic demand for their goods. Hence, quality grocery stocks Walmart (WMT) and Costco Wholesale (COST) could be ideal investments for solid gains. Read on….

The recent banking crisis has complicated the Fed's fight against stubborn inflation. Amid an inflationary environment, grocery stocks could help hedge your portfolio due to the inelastic demand for their products. Thus, it could be wise to invest in fundamentally strong grocery stocks like Walmart Inc. (WMT) and Costco Wholesale Corporation (COST) now.

Despite the Fed's aggressive interest rate hikes to fight high inflation, it remains elevated and is much above the 2% target. The Consumer Price Index (CPI) increased 0.4% in February and 6% year-over-year. Recent upbeat economic data releases indicating jobs growth and stubbornly high inflation increase the probability of more interest rate hikes.

The recent turmoil in the financial system due to the failures of two major regional banks might deter the Fed from its fight against stubborn inflation. Despite higher prices, consumers usually do not pull back on their spending on essentials, including groceries. So, grocery stocks enjoy an inelastic demand and can easily navigate economic turmoil as grocery companies can easily pass on rising raw material costs to consumers.

Following a rapid surge during the pandemic, the e-grocery market will likely thrive. Grocery retailers continue fine-tuning their e-commerce business models by providing faster pickup and delivery, which should provide a further growth catalyst.

According to a forecast released by Brick Meets Click and Mercatus, online grocery sales are expected to increase at an 11.7% CAGR over the next five years, with e-commerce's share of overall grocery spending growing from 11.2% in 2022 to 13.6% in 2027.

Given an inelastic demand for groceries, fundamentally sound grocery stocks WMT and COST could be worth considering for risk-adjusted returns.

Walmart Inc. (WMT)

WMT offers its diverse range of merchandise and services via retail and e-commerce avenues. The company provides a wide variety of products and amenities at economical prices under its Everyday Low Price (EDLP) strategy. It operates through three segments: Walmart U.S.; Walmart International; and Sam's Club.

On February 28, 2023, WMT and Citigroup (C) announced their collaboration to offer the Bridge built by Citi platform to WMT's 10,000 Small and Medium-sized Businesses (SMBs) within their U.S.-based supplier network. This platform is expected to enable WMT's suppliers to gain better access to the capital they need to expand their operations and achieve their objectives, thus contributing to the company's growth.

Furthermore, on February 21, the company approved an annual dividend of $2.28 per share for 2024, representing a 2% increase over the previous fiscal year's $2.24 per share payout. WMT has a long history of 49 consecutive years of dividend growth.

Its current annual dividend of $2.28 yields 1.64% on the current price level, with an average yield of 1.67% over the last four years, and dividend payouts have grown at a 1.8% CAGR over the past three years.

WMT's total revenues grew 7.3% year-over-year to $164.05 billion in the fiscal 2023 fourth quarter that ended January 31. Its income before income taxes increased 86.2% from the previous year's quarter to $8.90 billion. Furthermore, the company's consolidated net income grew 59.9% year-over-year to $5.81 billion, while its adjusted EPS came in at $1.71, up 11.8% year-over-year.

Analysts expect WMT's revenue to increase 3.5% year-over-year to $649.63 billion for the next fiscal year (ending January 2025). The company's EPS for the same year is expected to rise 11.3% from the previous year to $6.79. Moreover, WMT surpassed its consensus EPS estimates in three of four trailing quarters, which is impressive.

The stock has gained 17.9% over the past nine months to close the last trading session at $139.40.

WMT's strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

WMT has an A grade for Stability and a B for Value and Quality. It ranks #3 in the A-rated 37-stock Grocery/Big Box Retailers industry.

In addition to the POWR Ratings I've just highlighted, you can see WMT's ratings for Growth, Sentiment, and Momentum here.

Costco Wholesale Corporation (COST)

Global retailer COST operates warehouse clubs in eight different nations. The company offers merchandise in various categories, including groceries, candies, appliances, television and media, auto supplies, and more. It has roughly 838 warehouses worldwide and also maintains self-service gasoline stations.

On January 19, 2023, COST approved a new stock repurchase program of up to $4 billion. The new program replaces the previous one, under which $1.4 billion had already been repurchased.

Such buybacks are expected to boost return on assets and return on equity as it reduces the assets on the balance sheet, and there is less outstanding equity. Ultimately, this move could increase the company's value in the eyes of investors.

COST's total revenue increased 6.5% year-over-year to $55.27 billion for the fiscal 2023 second quarter that ended February 12. Its operating income grew 5% year-over-year to $1.90 billion, and its income before income taxes rose 10.1% from the prior year's period to $1.98 billion.

In addition, net income and net income per common share attributable to COST stood at $1.46 billion and $3.30, up 12.9% and 13% year-over-year, respectively.

The consensus revenue estimate of $243.40 billion for the fiscal year ending August 2023 reflects a 7.3% year-over-year improvement. Similarly, the consensus EPS estimate of $14.47 for the current year indicates a 9.1% rise year-over-year. Furthermore, COST surpassed its consensus EPS estimates in three of the trailing four quarters.

Shares of COST have gained 9% over the past nine months to close the last trading session at $487.05.

COST's POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.

The stock has a B grade for Stability and Sentiment. Within the same industry, it ranks #24 out of 37 stocks.

Beyond what we stated above, we also have COST ratings for Value, Growth, Momentum, and Quality. Get all COST ratings here.

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WMT shares were trading at $140.66 per share on Monday afternoon, up $1.26 (+0.90%). Year-to-date, WMT has declined -0.39%, versus a 2.77% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program.She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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